This month’s video takes an in-depth look at the closed-end fund marketplace. Charts include both diversified CEF indexes and single fund names. Overall the trend remains solid, however we are starting to see stretched premiums and tight discounts across the entire spectrum. Risk is high and caution should be warranted at this stage of the cycle. Video recorded after the market close on February 8, 2017.
Although often overlooked by individual investors thirsty for yield, many closed end funds (CEFs) have built notorious reputations for returning large amounts of principal to their shareholders. For investors in this small corner of the market, it’s more important than ever to understand the inner workings of fund management and distribution policies. A great way to start is evaluating a funds distribution history alongside its portfolio’s earnings, which will immediately shed insight into a sponsor or board’s management practices. By analyzing a fund’s semiannual or annual report an investor can glean fine details such as undistributed net investment income (UNII) alongside any changes in portfolio holdings and prospects for dividend coverage. Read more
Interestingly, I don’t think I can ever remember an instance where economists unilaterally came to a consensus with such conviction, especially in light of the many variables at hand. However, if behavioral finance taught me anything, it’s that the largest majority is often wrong. Typically only a small minority succeeds in prognosticating a factual outcome. Read more
Over the years I have seen investors make a number of mistakes with their income portfolios. Typically these range from having too much cash to being over allocated to a single asset class. However, the most egregious error that I come across all too frequently is the use of aggregate bond funds as core fixed-income holdings. Read more
Ever since I began managing money I have always gravitated toward multi sector income funds in lieu of traditional aggregate bond strategies as a way of increasing income and lowering volatility. The innate problem with core bond strategies is that they traditionally weigh the balance of their holdings based on the total size of the U.S bond market. This translates into a nonsensical practice of lending the largest slice of a client’s assets to the most indebted issuers.
I believe this method is fundamentally flawed when evaluating the creditworthiness of an issuer and its ability to ultimately service its debt load. Conversely, seeking out responsible issuers on a global level that assume debt to fund productive assets or new processes can make for a more sound investment. Read more